Markit Securities Finance Commentary
Brazilian borrowing booms

31 July 2013 | Posted by Will Duff Gordon
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Not long ago Brazil was seen as the most promising of the BRIC nations but slow growth, inflation and a lack of competitiveness are reflected by a YTD fall of 22% in the IBOVESPA.

  • Borrowing of Brazilian ADRs is on an upward curve to USD 4.6 bn
  • Markit Dividends expect an 8% fall in pay-outs to shareholders to BRL 60 bn this year
  • Assets in Brazil focused equity ETFs, net of price moves, have decreased by 14% YTD
  • The most borrowed Brazilian ADR is airline Gol Linhas at 9% of shares


Many European companies would be jealous of the low official unemployment figure in Brazil of under 6% and the government claim that inflation is under control. It is therefore not all doom and gloom for Olympic host nation.

But, economic growth is missing forecasts and the currency is stronger than ideal to boost exports.


Brazil’s manufacturers look to be slipping back into contraction mode according to our latest PMI reading which is hovering ominously at 50. It is a similar picture for the services sector.


Highlights from a recent report by the dividend team are:

  • The decline in the aggregate change over 2012 was primarily related to cuts from Petrobras, Vale and most Utility companies (who were forced to cap their charges).
  • Sectors with the highest expected rate of dividend growth Y-o-Y are Consumer Discretionary, Industrials, and Financials with 34%, 25%, and 19% increases respectively (see chart).
  • Credit growth across the Brazilian economy spurs dividend increases in Financials.
  • Lower commodity prices and weak global growth contribute to a forecasted decline of 32% in payouts from the Materials Sector; regulatory changes lead to a 29% expected decline of dividends in the Utilities sector.

All of this leads to a predicted forward yield of 3.9% for the iBovespa index.


ETP flows

Data from Markit’s ETP Analytics shows that at the beginning of the year there were USD 2.9 bn of assets in ETFs that followed Brazilian equities with most of this money in iShares products. When you strip out the c.20% declines in value due to share price falls you are left with 14% of investor outflows amounting to USD 428m of redemptions.


Bucking the trend was the Amundi MSCI Brazil ETF that saw decent inflows.

Short Selling of ADRs

Demand to borrow Brazilian depositary receipts listed in USD (ADRs) amounts to 4.6bn. This is 19% of the total and has been rising steadily all year.

Topping the list is airline firm Gol Linhas with a very large 13% of their free float on loan at a two year high.

Number three on the list of most borrowed is mining giant, Vale. Short sellers have been borrowing shares in this ADR since February and this looks well timed as the shares price has sunk. It remains cheap to borrow despite nearly half of the supply being on loan.


Local Securities Lending

The number of securities lending trades going through the local exchange (Bovespa) is on an upward trend according to their statistics. April saw a record 153,870 trades and the highest value to be borrowed at USD 49 m and we are not far off this in July.

Also of interest is that the fee to borrow GOL locally is similar to the cost to borrow the ADR at around 5% annualized.